State Watch: New Jersey's pension money pit

Experts who look into the finances of New Jersey’s public-employee pension plans often wind up making the same observation.

“The chickens are coming home to roost,” they say. As the experts reel off their numbers, the chickens begin to look more like circling buzzards.

There’s no good news/bad news scenario, it seems. Just bad news/worse news.

? A study by George Mason University’s libertarian-leaning Mercatus Center calculates the unfunded liabilities of New Jersey’s seven state-administered public-employee retirement plans to amount to $19,366 for every man, woman and child in the state. That’s 34 percent of the New Jersey’s gross state product, highest percentage in the Northeast.

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? Another research group, State Budget Solutions, reckons New Jersey’s unfunded pension liabilities — future obligations with no funds committed to meet them — to total $108 billion.

With bonded borrowing and other debt added on, the cost comes to $24,000 for every man, woman and child in New Jersey, Budget Solutions says. Its researchers rate New Jersey’s overall fiscal condition as worst in the nation — 50th.

? The state government’s own pension numbers crunchers or actuaries acknowledge the situation as bleak, though less so. They calculate the long-term pension-funding shortfall at $45 billion. (The state’s entire annual budget is around $33 billion excluding federal tax dollars pumped into it.)

? Yet another research group, Common Sense Institute of New Jersey, contends, however, that the state’s $45-billion figure grossly understates the shortfall by over-valuing pension system investments. When a market-evaluation method instead of an actuarial-evaluation method is applied to investments, the pension plans’ funding shortfalls are $56 billion, not $45, it says.

The troubling assessments go on.

Moody’s ranked New Jersey’s pension plans as having the fourth highest unfunded liabilities in the nation. A collapse could come as soon at 2018, Moody’s said, To shore up the wobbly system, it added, New Jersey might have to hike taxes and/or siphon dollars out of other major spending areas such as schools and Medicaid.

A Pew Foundation study found the state’s pension finances “a serious concern.” A study by Northwestern University’s Kellogg School of Management said New Jersey’s public pension system could go into a tailspin before the decade ends. The Securities and Exchange Commission in 2010 accused the state of fudging pension data, 2001-2007, to mislead investors in state-issued bonds.

The pension plans affect not only the level of taxes, government services and aid. They also affect the state’s economy, especially the Trenton region. Just two of the seven plans — the teachers’ and local and state government employees’ — have nearly 674,000 current and future retirees.

In his recent State of the State address, Gov. Christie acknowledged a “hard truth.” Tax dollars to bolster the pensions and to pay interest on state borrowing are going to cut into other areas, he said. He mentioned education, health care, infrastructure, law enforcement — and tax cuts.

Meanwhile, State Senate President Steve Sweeney, a Democrat and a gruff Iron Workers union official, has served notice he’ll hold the governor to his previous pension-funding commitments even if he has to “shut down” the state government to do so.

The political odd couple, Sweeney and Christie, in the governor’s first term, worked out a pension reform deal. It included hiking retirement ages in the future, requiring employees to pay higher pension contributions, and committing the state government to boost its annual appropriations to the plans in coming years.

A recent Common Sense Institute report hailed the Christie-Sweeney reform as “significant” and worthy of “applause.” It was the first such initiative after decades of ducking the funding problems in Trenton, the report noted.

But will the reforms do the trick? The institute’s researchers doubt it. The Christie-Sweeney reform commits the state’s taxpayers to a $1.67 billion pension-system contribution hike in the current fiscal year. The annual taxpayer payment would rise to $5 billion in five years.

The projected total taxpayer contribution this fiscal year is $3.3 billion. To fund the plans at a stabilizing level, the state’s own numbers people concede that $2.6 billion more — $5.9 billion in state and local tax dollars — should be going into system.

The Common Sense Institute’s numbers people contend, however, that if the system’s investments are more realistically evaluated, state and local taxpayers’ share of contributions to secure the pension plans would come not to $5.9 billion, but to $8.7 billion.

The eye-glazing, back-and-forth numbers indicate a consensus, however — the hole New Jersey has dug itself into on public pensions is deep indeed, whatever the precise depth.

Aggravating the funding problem are early retirement ages compared to the public sector and more generous terms than the public sector’s — the result of legislative and union contract pledges made to teachers and other public employees including police.

The average retirement age of members of the Teachers Pension and Annuity Fund is 61.6 years. The average retirement age of the state and local Public Retirement Pension System, the state’s biggest plan, is 62.5.

For the Police and Firemen’s Retirement System, the average retirement age is 52.4.

The Common Sense group’s recent report on New Jersey’s pension money pit declared that political shenanigans helped dig it — “outright dishonest acts and malfeasance.”

The blistering report was written by Richard C. Dreyfuss and Steven Malanga, of the conservative Manhattan Institute. Dreyfuss is a former actuary for Hershey Foods Corp. and chairman of the Pennsylvania Health-Care Cost Containment Council. Malanga is editor of the Manhattan Institute’s City Journal.

The report cited “double-dipping” — drawing a public salary while also collecting a public pension — as one of the pension system’s afflictions. The practice is widespread in the Christie administration and on both sides of the aisle in the state legislature. Legislation to ban the practice has been held in legislative committees for three years.

Byzantine financial maneuvers, under both Republican and Democratic governors, perpetuated a political trend of underfunding public pensions. The “savings” from these maneuvers were diverted to cover other spending or tax reductions. The Common Sense report spotlighted some of these maneuvers.

? In 1992, under Gov. Jim Florio, a Democrat, the Pension Revaluation Act, with Republican support, reduced taxpayer contributions to the public retirement plans by $1.5 billion. This was accomplished through the financial artifice of introducing a more optimistic method of evaluating pension system investments. The result was, the report’s authors say, to make the retirement plans’ finances “look far rosier” than they really were.

?Two years later, Gov. Christine Whitman, a tax-cutting Republican, ducked state contributions to the pension plans through such esoteric accounting tweaks as “backloading” or “projected unit credit.”

And in 1997, Whitman pushed a “Pension Security Plan” through the Legislature — a state government version of Wall Street wizardry. The maneuver entailed borrowing $2.75 billion by issuing bonds. This enabled the state — again — to skip contributions to the pensions.

The plan was, in effect, a wager that the state could clean up in the stock market and more than cover costs. Believing it looked like a good bet for their members, the N.J. Education Association backed the plan. And leaders of the Communication Workers of America, the biggest state employees union, joined Whitman officials in a bus tour of the state to help sell it.